Variable Annuity DB Investment

[Guest 692729]

I ran across a broker that is using a individual variable annuity as investment option for a defined benefit plan. I have not seen this done before. Here is how it works. The trustees buy and individual annuity using the an older participant or retiree in the defined benefit plan. the issuing insurance company pays a bonus to the plan for the initial investment..which is shown as an investment gain. the investment plus the gain can then be invested in variable seperate accounts, the fixed account or a combination of the two. The individual variable annuity has a step up feature that locks in the highest value of the annuity. If and when the participant dies the annuity pays out the highest cash value based on the step up and an additional death benefit.

Has anyone ever seen this before? Is it legal? It is definitely an interesting funding idea especially with the uncertainty of the stock market. Something seems a little strange buying an annuity based on the life of a retiree or participant...but I guess it is done in away when corporations buy Key Man insurance. Curious if anyone has any knowledge about this.

[david rigby]

The "legal" part is beyond my expertise. But this sounds like another inefficient investment, providing a transfer of wealth from the plan/sponsor to the broker.

[mbozek]

I am not an acutary but I have one question: What is the plan paying as expense charges/fees to the ins co for the guarantees in the event the remote contingency of death occurs? In my review of VA products the load charges are usually 2- 2.5% with the guarantee being about 1.0%. I think this is product is a solution in search of a problem. I also understand from investment professionals that DB plans should not invest in VA/mutual fund type products because of the high expenses of the products which reduces the return- Your client should seek a legal opinion that it is not imprudent to invest in this product.

[AndyH]

"A solution in search of a problem" is an excellent description of this arrangement.

[Guest dsyrett]

What is implied here but not said is that you are buying a products with a tax deferral feature and putting it in a plan with a tax deferral feature - akin to putting a municipal bond fund in a plan - a little overkill - and probably at the expense of unnecessary fees.

[MGB]

Note that under the new 401(a)(9) regulations, the only way to have a variable payout from a DB plan is to buy a variable annuity (but not with the bells and whistles of the one described here).

We do have clients that buy special products (not high commissioned individual products) from insurance companies specifically designed to accomplish the ability of the participants to have a variable payout.

In the original posting, it did not say...what is actually paid to the participant? Are they just receiving what the plan said they will receive (and the plan is receiving the variable payout), or is the participant's payout variable under this arrangement?